Tim Buckley, Director for Energy Finance Studies 1 Simon Nicholas, Energy Finance Analyst November 2020 The Economic Case for Adani To Lead India’s Domestic Energy Strategy A Coal Power Phaseout to Align the Group’s ESG Commitments With India’s Renewables Future Executive Summary The Adani Group has transformed dramatically over the last five years, with total assets of the now six listed entities collectively exceeding US$50bn. The Adani family equity stakes have a combined equity value of US$26bn at current prices, a trebling relative to the US$8.7bn estimated value back in May 2015 after the deconsolidation of Adani Enterprises Ltd (AEL) was complete. The composition of the Adani Group has also transformed, with the most valuable stake being in Adani Green Energy (44% of the Adani family equity value total), almost double Adani Ports (23%), whilst Adani Transmission (10%) has likewise had a stellar performance. After a decade of losses, Adani Power (12.4 gigawatts [GW] of coal-fired power generation) is much diminished at just 5% of the total. Adani Green, Adani Ports and Adani Transmission all have significant access and standing in global financial markets (both debt and equity), leveraging an unparalleled financial strength in India the Adani Group is using to full advantage. However, with this comes a significantly higher profile. With environmental, social and governance (ESG) risk evaluation never more prominent in global financial markets, the Adani Group has much to leverage, but also much to lose. The Economic Case for Adani to Lead India’s Domestic Energy Strategy 2 With the Adani Group unable to attract independent debt or equity investors into the Carmichael thermal coal mine and rail proposal in the Galilee Basin, in Queensland, Australia, Adani Ports has just become directly involved in financing and operating the rail haulage works for the globally controversial Carmichael. IEEFA sees an opportunity for the Adani Group to align and continue to lead India’s energy strategy of domestic self-reliance by committing to an orderly coal power phaseout. This would in reality be a commitment to closing coal plants when power purchase agreements (PPAs) expire, knowing the massive ongoing renewables deflation means these coal plants will be unviable and obsolete. Gautam Adani penned a May 2020 op-ed forecasting exactly this outcome, marking a strategic pivot in his thinking, and in November announced a new green hydrogen focus. As an Indian first, such a commitment would enhance the Adani Group’s ESG standings, lower the cost and raise the access to international capital and allow the group to continue to prudently fund its aggressive growth plans. It would also be entirely aligned with – and lead – India’s energy strategy, and put Prime Minister Narendra Modi’s decarbonisation vision firmly on the global stage. The Economic Case for Adani to Lead India’s Domestic Energy Strategy 3 Table of Contents Executive Summary ....................................................................................................................................... 1 1. Introduction ................................................................................................................................................. 4 Adani’s Strategic Alignment with India’s Future ....................................................................... 6 2. Adani Green: India’s Largest Energy Company ............................................................................. 8 Adani Green Energy’s Leading Indian Renewables Profile ................................................... 9 2020 Has Been a Landmark Year for Adani Green................................................................. 10 India’s World Leading Energy Transformation ....................................................................... 11 The Domination of Domestic Renewable Energy in India .................................................. 13 Who Would Still Fund a New Coal Plant in India? .................................................................. 16 Will Adani Green Lead India Into Green Hydrogen? ............................................................. 17 3. The Rapid Realignment of the Adani Group ................................................................................ 19 Peak Thermal Coal Use in India Is Close ..................................................................................... 20 Adani Could Commit To Coal Power Phaseout ........................................................................ 22 A Key Adani Competitive Advantage Is Global Capital Access .......................................... 23 4. Adani Ports’ ESG Ratings Backlash Risk ........................................................................................ 24 Adani Ports Invests in the Galilee Thermal Coal Project ..................................................... 24 Adani Ports Is Talking of Its Transition Path From Coal ..................................................... 26 Debt Pricing Case Study: Adani Ports vs APCT ........................................................................ 27 A Key Strategic Advantage of Adani Ports Is Its Global Capital Markets Access ....... 29 5. The Godda Power Plant Should Do More To Support Indian Jobs ..................................... 30 Bangladesh Power System Entering Financial Crisis ............................................................ 30 Opportunity To Re-Configure Godda To India’s Benefit ...................................................... 32 6. Abbot Point Port Is India’s Key Coking Coal Asset .................................................................... 34 Queensland Coking Coal Outlook Brighter Than Thermal Coal ....................................... 35 Abbot Point Downgraded To ‘Junk’ Status ................................................................................ 36 7. Net Zero Emissions Commitments Are Building, Rapidly ..................................................... 37 Ongoing Underperformance Drives Utility Decarbonisation ............................................ 37 China Commits To Net Zero before 2060 ................................................................................... 38 8. Thermal Coal Follows Oil and Gas Down in 2020 ..................................................................... 41 Final Investment Decisions for Coal Hit a Decade Low ........................................................ 43 As Global Majors Progressively Exit Coal, What’s Next? ..................................................... 44 9. Global Finance’s Coal Divestment Accelerates ........................................................................... 46 Annex 1: Share Performance of Coal Stocks ..................................................................................... 47 Annex 2: Share Performance of Utilities and Oil & Gas Majors ................................................ 48 About the Authors ....................................................................................................................................... 49 The Economic Case for Adani to Lead India’s Domestic Energy Strategy 4 1. Introduction More than any other group in India, the Adani Group has grown dramatically in breadth and depth of business exposures across the country over the last decade. The Adani Group has six Bombay Stock Exchange (BSE) listed public companies. As detailed in Figure 1 (listed firms are highlighted in purple), these are: 1. Adani Ports & SEZ (APSEZ) – India’s largest private port owner; 2. Adani Transmission Limited (ATL) – India’s largest private grid transmission and distribution (T&D) company; 3. Adani Green Energy Limited (AGEL) – India’s leading renewable energy infrastructure developer, operator and owner (refer Section 2); 4. Adani Power Ltd (APL), owner of 12.4GW of coal-fired power plants; 5. Adani Gas Limited (AGL), a gas pipeline and distribution utility; and 6. Adani Enterprises Limited (AEL). AEL is described by the Adani Group as their incubator entity, with new business diversifications including airports, toll roads, water and datacentres. AEL also operates the legacy imported-coal trading unit, and thermal coal mining in India. For a decade now AEL has also been trying to develop the controversial Carmichael thermal coal mine and rail proposal in the Galilee Basin, Queensland, Australia. Figure 1.1: Adani Group Structure Source: Adani Green Energy Investor Presentation, September 2020. Note: AEL is also the owner of the Carmichael Coal Mine proposal in the Galilee Basin, Queensland (omitted from the chart). The Economic Case for Adani to Lead India’s Domestic Energy Strategy 5 The private Adani family entity also holds a long lease on the 50 million tonnes per annum (Mtpa) Abbot Point Coal Terminal (APCT) in Queensland. September 2020 saw APSEZ announce it would start a new coal haulage unit to cater for the Carmichael coal mine.1 The combined equity capitalisation of the six listed Adani companies is a record high US$38.1bn and the combined enterprise value (equity + debt) totals US$53bn.2 The Adani Group’s gross equity share of its six listed entities has a capitalisation of US$26.4bn. The Adani Group’s share of listed net debt is US$10.7bn by comparison (Figure 1.2). In addition, the Adani Group does have margin lending against this equity in its private holding company, but this debt value is not disclosed. Adani Green Energy is now a top 25 listed company in India with a market capitalisation of Rs1,168bn